India’s weakening rupee fuels inflation woes

NickGodt

MUMBAI (MarketWatch) -- Indian markets didn’t escape the bloodbath in global stocks over the past week. Yet, alongside fears of a double-dip recession in the United States and worries that Europe’s sovereign-debt crisis could spin out of control, the pressing concern here was about the rupee.

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India’s currency sank 4% to a two-year low over the past week, adding to a more than 11% slide that began in August.

Against the U.S. dollar, the rupee nearly hit the key 50 level on Thursday, where some strategists think the Reserve Bank of India (RBI) might consider intervening.

A sharply weaker rupee isn’t helping India with inflation, its number one economic concern over the past year and a half. India imports about 80% of its huge oil requirements which it pays for mostly in dollars.

India’s government also tries to shield its population from high crude oil prices through price controls. But oil retailers were allowed to hike petroleum prices by 3.14 rupees per liter last week to adjust for losses incurred due to the falling rupee.

As the central bank hiked interest rates last week for the twelfth time since March 2010, it said the petroleum price hike would have a direct impact on inflation. In August, wholesale inflation was up 9.78% from the year earlier level.

Speaking to reporters on Friday, RBI Governor Duvvuri Rao played down expectations of a central bank intervention, saying the rupee’s current weakness was the result of external factors and not a reflection of India’s economic fundamentals.

The drop in the rupee has come as foreign investors have fled higher-yielding currencies and assets, such as Indian stocks. Foreign funds sold $2.4 billion of stocks in August, according to the Securities and Exchange Board of India.

The selling continued over the past week, though not as intensely.

The Sensex (1) slumped 4.6% for the week as global markets reacted to a weakening outlook on U.S growth by the Federal Reserve, while sovereign-debt concerns in Europe continued to take their toll.

The drop wasn’t as bad as in Hong Kong, where the Hang Seng index (HSI) fell 10.3% or in Germany, where the Dax was off 7%.

Global concerns about a double-dip recession in the world’s advanced economies aren’t seen as a threat to India’s economic fundamentals as much as for other Asian economies, according to Leif Eskesen, economist for India at HSBC.

“Compared to [other emerging markets] and Asian peers, India faces a more severe inflation problem and the domestic orientation of the economy also shelters it more against adverse global economic spillovers,” he said.

Yet, big hits were seen for the likes of Tata Motors Ltd. ‘s whose Jaguar Land Rover brand heavily relies on European demand. Tata’s stock slumped 8.8% for the week.

For the technology-outsourcers, where a weakening rupee provides an advantage in the global market, losses were lighter. Tata Consultancy Ltd. (532540) fell 3.7%, Infosys Ltd. (500209) lost 2.2%, and Wipro Ltd. (507685) was off 0.3% for the week.

Rupee’s hit to gold demand?

A weaker rupee might also hurt demand for gold from India, the world’s largest consumer of the precious metal, according to Naveen Mathur, commodities and currencies analyst at Angel Broking.

“There will be some negative impact, definitely. We can expect at least a little dent [in demand] during the festival season,” Mathur said.

The drop in the rupee is taking place just at the start of the post-monsoon festival season, a time which normally sees strong demand for jewelry.

However, the impact of a weaker rupee may be mitigated as gold prices have actually fallen over the past week, with investors seeking the safety of the dollar, at the expense of the precious metal. Gold for December delivery
GC1Z
has fallen 8% over the past week.

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